The US is still the safe haven of choice, even if the dollar is lower

• Demand for US debt drives bond prices to record highs.
• US Treasury yields recover slightly but near all-time low.
• Federal Reserve expected to cut 50 basis points at the March 17-18 meeting.

The dollar’s abrupt reversal over the past three days seems to belie its two month run as the safe haven of choice from the economic threat of the Coronavirus.

From January 31 to February 20 as the China crisis exploded the euro lost 2.8% against the US dollar. 

That steep three week run down under the pressure of the mainland quarantine and factory closures and their implications for the global economy culminated an almost two-year decline in the euro that began, to choose one starting point of many, on April 18^th 2018 at 1.2372. Taken to the low of February 20^th at 1.0783 the euro had shed 12.8% of its dollar value.

Reuters

The four day climb to 1.0879 by the 26^th, last Thursday, was an incidental bit of profit-taking as the euro neared the lower border of its nearly two-year trend.

Reuters

Two factors then accelerated dollar decline into overdrive. On Friday the 27^th the yield on the US 10-year Treasury dropped below its previous record of 1.31% as bond prices soared with the demand for the safety of US debt.  

Reuters

As Treasury yields fell Federal Reserve Chairman Jerome Powell issued a rare unscheduled statement before the market close on Friday.  

“The fundamentals of the U.S. economy remain strong,” Powell said, “However, the Coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

That brief note was carefully reminiscent of previous crisis comments. 

In August 2007 as credit spreads began to widen in the slide into the financial crisis, the Fed issued a statement saying it was “prepared to act as needed”.  Last June as the US-China trade war and Brexit threatened to derail the expansion Powell said the central bank would “act as appropriate.”  Three 0.25% rate cuts followed in July September and October.

With the Fed target range at 1.50% to 1.75% only the Bank of Canada which meets on Wednesday has as much leeway for interest rate stimulus of its economy.  The Reserve Bank of Australia cut it cash rate by 0.25% on Tuesday to 0.50%. 

The fed funds futures are wholly in agreement that a rate cut is coming at the March 17-18 FOMC meeting. In a rare unanimity of opinion the view is 100% for a 50 basis point reduction and 71.8% behind a further 25 point cut at the April 29^th meeting.

CME Group

CME Group